As every employer wishes to protect their business through back to back legal audits and compliance measures, the employers also protect their business interest when hiring employees for which a non-compete clause is one of the key provisions that serves this purpose.

However, recent Supreme Court rulings have established clear boundaries on the validity of such clauses. These rulings define the extent to which a non-compete clause is enforceable and also outline the circumstances under which it may be deemed invalid.

Following are the recent rulings of the Supreme Court that discusses the applicability of non-compete clauses.

In Superintendence Company of India Private Ltd Vs. Sh.Krishan Murgai (1981) 2 SCC 246, the Supreme Court held that “The true rule of construction is that when a covenant or agreement is impeached on the ground that it is in restraint of trade, the duty of the court is, first to interpret the covenant or agreement itself, and to ascertain according to the ordinary rules of construction what is the fair meaning of the parties. If there is an ambiguity it must receive a narrower construction than the wider” and further subjected the case to a narrower construction and ruled the contract was prima facie void.

In Niranjan Shankar Golikari Vs. The Century Spinning and Mfg. Co Ltd., AIR 1967 SC 1098, the Supreme Court has provided a liberal arrangement wherein the negative covenant was that the employee would not during the contract period, engage in trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties, is not restraint of trade unless the contract is unconscionable or excessively harsh or one-sided. In such a circumstance, enforcing a negative covenant that he will not be employed elsewhere during the subsistence of the agreement, is really necessary and he has to be injuncted, otherwise, the

company will be put to loss and there is every reason to apprehend that the information or trade secret likely to be leaked out.

In the case of Percept D’Mark(India) Pvt.Ltd. V. Zaheer Khan and Anr. (2006) 4 SCC 227 the apex court held that

“Under Section 27 of the Contract Act: (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable, (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end, (c) as held by this Court in Gujarat Bottling v. Coca-Cola [(1995) 5 SCC 545] this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts”

Indian courts are strictly assessing the applicability of non-compete clauses based on the nature of each case. Additionally, they have also begun applying the Garden Leave Clause. For instance, In M/s Kouni Travel (l) Pvt. Ltd V Mr.Ashish Kishore, 2007 SCC OnLine Bom 1604, the High Court of Bombay held that, “The Company reserves the right to require you to remain away from work/employment for the period of 3 (three) months after termination or resignation of your services with the Company. You shall agree to comply with all conditions that may be laid down by the Company at the time of such resignation or termination. The Garden Leave period shall commence after you have served the notice period and have ceased to be on the rolls of the Company.”

Takeaway for employers and employees:

From the aforesaid 4 landmark judgements, it can be said that the following few principles regarding the applicability of non-compete clauses were followed by the Indian courts strictly on this subject:

1. There should be a legitimate business interest to be protected in order for the non-compete clause to be valid.
2. The scope of restriction shall not be exceeded than what is necessary to protect the interest of the business.
3. Inclusion of a Garden Leave clause, wherein the employer shall pay the terminated employee for the period in which they are restrained from competing.

Therefore, from the aforesaid judgements and principles, non-compete clauses require an equivocal approach to safeguard the interest of the business of the employer as well as employee.